Do “Hard” Choices Lead to Good Outcomes?
Javier Milei appears to be fully aware of what is needed to rejuvenate his nation, and is also being very honest about what will be required. But also very optimistic about the benefits.
During his inaugural address, he bluntly told the country that, “We are going to take all the necessary decisions to fix the problem left by 100 years of waste by the political class, even if it is hard in the beginning. We know that in the short term, the situation will worsen, but then we will see the fruits of our efforts.”
I like that message. The last part of it is basically the first two steps in my Fourth Theorem of Government.
But does it apply in a nation – like Argentina – that needs “shock therapy“?
Critics call this approach “disaster capitalism” and they think it is a terrible outcome.
In an article published last month, the U.K.-based Economist calls it “Daredevil Economics” and presents evidence that it produces good outcomes. Here are some excerpts, starting with the observation that there was a lot of pro-growth reform in the last 1900s..
We analysed data from the Fraser Institute, a free-market think-tank, which measures “economic freedom” on a ten-point scale. We considered cases where a country improves by 1.5 points or more—a quarter of the gap between Switzerland and Venezuela—within a decade, indicating that bold, liberalising reforms have been undertaken. In the 1980s and 1990s such “daredevil economics” was common… Politicians changed foreign-trade rules, fortified central banks, cut budget deficits and sold state-owned firms.
That’s the good news.
The bad news is that the “Washington Consensus” no longer exists.
Daredevil economics has declined in popularity… Books such as Joseph Stiglitz’s “Globalisation and its Discontents”, published in 2002, and Naomi Klein’s “The Shock Doctrine”, in 2007, fomented opposition to the free-market “Washington consensus”.
This anti-market evolution is very unfortunate. At least if you care about people having better lives.
The article cites academic research showing that bold reforms produce good results, even if there is short-run pain.
…the view that daredevil economics failed does not stand up to scrutiny, even if projects often produced short-term pain. …a growing body of research suggests that daredevil economics has largely achieved its aims. A paper by Antoni Estevadeordal of the Georgetown Americas Institute and Alan Taylor of the University of California, Davis studies the effect of liberalising tariffs on imported capital and intermediate goods from the 1970s to the 2000s, finding that the policy raises gdp growth by about one percentage point. …a paper published in 2021 by Anusha Chari of the University of North Carolina, Chapel Hill and Peter Blair Henry and Hector Reyes of Stanford University finds positive impacts from a wide variety of reforms in emerging markets, from stabilising high inflation to opening capital markets. …Daredevil economics may be disruptive, but it pays off.
The article also cites research from two European Central Bank economists, which I wrote about back in 2018.
Their findings are very much in line with what President Milei said in his inaugural address.
Our main findings are as follows: on average, reforms had a negative but statistically insignificant impact in the short term. This slowdown seems to be connected to the economic cycle, and the tendency to implement reforms during a downturn, rather than an effect of reforms per se. Reforming countries however experienced a growth acceleration in the medium-term. As a result, ten years after the reform wave started, GDP per capita was roughly 6 percentage points higher than the synthetic counterfactual scenario.
I’ll close by observing that there is research showing that politicians who enact pro-market reforms are rewarded during elections.
It will be very interesting to see if President Milei can a) implement his reforms, and b) reap the rewards when the economy adjusts and grows faster. If so, that will confirm the third sentence of the Fourth Theorem of Government.
P.S. If nothing else, Milei is being very bold.
REMARKABLE! In his first act, newly sworn President of Argentina, Javier Milei, signs an executive order reducing the Argentine government from 21 Departments to 9. A major reduction of bureaucracy and overhead. Impressive. pic.twitter.com/F08Z0E0Feu— Fernando Amandi Sr.🌐 (@FernandoAmandi) December 10, 2023
Wow, this makes the best American president in my lifetime seem like a big-spending leftist by comparison.
P.P.S. On the other side of the Andes from Argentina, Chile already has shownthat shock therapy produces great results. But there weren’t elections when those reforms happened. If market reforms are successfully implemented in Argentina, following a democratic election, that will be even more impressive.
By Dan Mitchell